More and more nations are looking for alternatives to replace the dollar.
When Russia’s foreign exchange reserves were frozen and then excluded from the SWIFT system because of its conflict with Ukraine, Moscow turned to the yuan. However, they are far from the only ones using Chinese currency. In recent years, many countries in the southern hemisphere have been planning similar steps, the capriciousness of the dollar has only strengthened the economies thinking about the change.
Which major nations are turning to the yuan?
The increasingly strict Western financial system practically excluded the country from euro and dollar settlements, which gave the yuan more space in its foreign trade, as a result of which it is at the forefront of its use. According to data from the Russian central bank, Chinese currency was used in 34% of imports and 25% of exports. This is partly attributable to the increase in Chinese imports, imports from third countries (which have Chinese swap agreements) also increased. However, its spread among Russians goes far beyond commercial settlement. Russia is currently the third largest center for offshore yuan transactions, and Chinese has become the most traded currency on the Moscow stock exchange. It also occupies an important place in the sovereign wealth fund, which was reorganized at the end of 2022 to reduce exposure to the currencies of unfriendly countries (those that support sanctions against Russia). Several major Russian companies have issued yuan-denominated bonds in the past two years, underscoring the currency’s growing importance in the nation’s trade. The aluminum giant RUSAL was the first, followed by Rosneft and Polyus.
In 2014, they agreed on an 11 billion dollar swap facility with China, so the South American country was able to provide funding to its domestic credit institutions without using its foreign exchange reserves. The settlement allowed the two nations to exchange their currencies at predetermined interest rates and exchange rates. In April 2023, Argentina acquired 1.04 billion yuan to pay for its Chinese imports. The limit was later expanded to allow access to additional funds. The country has also used the Chinese currency for its debt payments to the International Monetary Fund (IMF), making it the first South American country to use the Chinese currency to settle its debts, which could be an important milestone in the wider use of the yuan in the South American continent. According to the IMF’s report last August, the reserves of the Argentine central bank accounted for a significant part of China’s swap framework, and it was an important source of short-term liquidity for the payment of debts and the financing of imports. China has provided key support to Argentina’s economy, yet the newly appointed president, Javier Milei, wants to distance himself from them, stressing that his country will no longer cooperate with a “communist” regime, reportedly calling the Chinese government “murderers.” Because of this, on December 21, 2023, China withdrew the swap framework until Milei shows commitment or any constructive cooperation with Beijing. The loss of cheap financing during this difficult period is a big blow to Argentines, who are currently struggling with a severe financial crisis and skyrocketing inflation.
In the past decade, China has concluded swap deals with the central banks of many countries, but perhaps none of them received as much response as the November agreement it concluded with Saudi Arabia. In this case, it is 50 billion yuan ($6.98 billion). Although the amount itself is not large compared to the trade turnover between the two countries, the step is symbolic, considering the key role of the Arab nation in the development of the petrodollar system. Many analysts believe that this is just the beginning, and Beijing and Riyadh may be planning greater cooperation.
China overtook the United States as Saudi Arabia’s largest trading partner in 2011, with more than $64 billion worth of goods exchanged. The countries have since increased their turnover, which exceeded 100 billion in 2022. The Middle Eastern oil superpower became China’s largest supplier of “black gold” in 2020, although in 2023 Russia overtook the Asian superpower in this field. For Saudi Arabia, the foreign exchange transaction is an opportunity to diversify foreign exchange reserves. The world’s largest oil exporter has long been pegged to the dollar for oil deals. According to a 2022 Wall Street Journal report, the two countries were in talks to import Chinese oil in yuan. No such announcement has been made so far, but the recently opened swap line clearly provides an opportunity for such moves. Having Saudi oil priced in yuan could deal a blow to the petrodollar, which has been a major part of the US currency’s dominance since the 1970s.
In February 2023, Brazil paved the way for the use of Chinese currency, gaining access to the Chinese equivalent of SWIFT, CIPS (Cross-border Interbank Payment System).
In April, it entered into a currency swap agreement with China that completely removed the dollar as an intermediary. During his visit to China, Brazilian President Luiz Inacio Lula da Silva criticized the dominant role of the American currency: “Why should all countries be tied to the dollar in trade? Who decided that the dollar will be the world’s currency?”
A little more than 90% of Brazil’s foreign trade is still done in dollars, but the proportion of other currencies is increasing. The country’s yuan-denominated foreign exchange assets reached 5.37% by the end of 2022, overtaking the euro, making the Chinese currency the second largest reserve currency. Remarkable considering that five years ago Brazil did not have a yuan.
Like Russia, Iran has been practically excluded from the Western financial system, and has been looking for alternatives for a long time. China already started buying oil from Iran in 2012, which it paid in yuan, and the two nations are negotiating to boost the settlement of trade in the local currency. Iran’s Economy Minister Ehsan Khandouzi admitted that there is still a lot of work to be done to facilitate the use of the Chinese currency. In 2018, the country, also known as the Persian State, replaced the dollar with the yuan on its official exchange rate reporting platform in a symbolic gesture.